18-16 - finra.org

1 Regulatory Notice 18-16 . High-Risk Brokers April 30, 2018. finra Requests Comment on finra Rule Amendments Notice Type Relating to High-Risk Brokers and the Firms That 00 Request for Comment Employ Them Suggested Routing Comment Period Expires: June 29, 2018 00 Compliance 00 Legal Summary 00 Operations 00 Registered Representatives finra seeks comment on proposed rule amendments that would impose additional restrictions on member firms that employ brokers with a history of 00 Senior Management significant past misconduct. These brokers, while relatively small in number, may present heightened risk of harm to investors, and any misconduct by Key Topics them also may undermine confidence in the securities markets as a whole. 00 BrokerCheck Disclosure The rule proposals would strengthen the existing controls, some of which are highlighted below, finra has applied to such brokers to further promote 00 Disciplinary Proceedings 00 Eligibility Proceedings investor protection and market integrity.

2 00 Heightened Supervision The new proposals are one part of finra 's initiatives to confront high-risk 00 Statutorily Disqualified Persons brokers. finra will continue to evaluate various rules, examination and risk- 00 Supervision monitoring programs, and technologies to determine further enhancements 00 Taping Rule that finra can make to keep high-risk brokers from potentially harming investors and compromising the integrity of the financial markets. Referenced Rules & Notices finra is requesting comment on proposed amendments to: 00 finra Rule 3110. 1. the Rule 9200 Series (Disciplinary Proceedings) and the 9300 Series 00 finra Rule 3170. (Review of Disciplinary Proceedings by National Adjudicatory Council 00 finra Rule 8312. and finra Board; Application for SEC Review) to allow a Hearing Panel 00 finra Rule 9200 Series to impose conditions or restrictions on the activities of member firms 00 finra Rule 9300 Series and brokers while a disciplinary matter is on appeal to the National 00 finra Rule 9520 Series Adjudicatory Council (NAC), and to require member firms to adopt heightened supervisory procedures for brokers during the period the 00 finra Rule 9556.

3 Appeal is pending; 00 NASD IM-1011-1. 2. the Rule 9520 Series (Eligibility Proceedings) to require member firms to 00 NASD IM-1011-2. adopt heightened supervisory procedures for brokers during the period a 00 NASD Rule 1010 Series statutory disqualification (SD) eligibility request is under review by finra ; 00 Regulatory Notice 18-15. 1. 18-16 April 30, 2018. 3. Rule 8312 ( finra BrokerCheck Disclosure) to disclose the status of a member firm as a taping firm under Rule 3170 (Tape Recording of Registered Persons by Certain Firms);. and 4. the NASD Rule 1010 Series (Membership Proceedings) (MAP rules) to place additional limitations on member firms by requiring a member firm to first submit a written letter to finra 's Department of Member Regulation, through the Membership Application Program Group (MAP Group), seeking a materiality consultation when a natural person that has, in the prior five years, one or more final criminal actions or two or more specified risk events seeks to become an owner, control person, principal or registered person of an existing member firm.

4 Specified risk events (as described in detail below). generally means final, adjudicated disclosure events disclosed on a person's or firm's Uniform Registration The proposed rule text is available in Attachment A. With respect to proposal number 4, finra also seeks specific comment on the proposed numeric threshold and criteria that would trigger a materiality consultation. A detailed economic analysis of the proposed rule amendments, including the numeric threshold and criteria used for identifying brokers that would be impacted by the proposed amendments, is discussed below, and the exhibits referenced in this economic impact assessment are available in Attachment B, Exhibits 1, 2, 3 and 4. In addition, finra is focusing attention on high-risk brokers by publishing Regulatory Notice 18-15 to reiterate the existing obligation of member firms to adopt and implement tailored heightened supervisory procedures under Rule 3110 (Supervision) for high-risk brokers;2.

5 And revising finra 's qualification examination waiver guidelines and related procedures to more broadly consider past misconduct when considering examination waiver Questions concerning this Notice should be directed to: 00 Kosha Dalal, Associate Vice President and Associate General Counsel, Office of General Counsel, at (202) 728-6903. Questions concerning the Economic Impact Assessment in this Notice should be directed to: 00 Jonathan Sokobin, Senior Vice President and Chief Economist, Office of the Chief Economist (OCE), at (202) 728-8248; and 00 Hammad Qureshi, Senior Economist, OCE, at (202) 728-8150. 2 Regulatory Notice April 30, 2018 18-16 . Action Requested finra encourages all interested parties to comment on the proposal. The comment period ends June 29, 2018.

6 Comments must be submitted through one of the following methods: 00 Emailing comments to or 00 Mailing comments in hard copy to: Jennifer Piorko Mitchell Office of the Corporate Secretary finra . 1735 K Street, NW. Washington, DC 20006-1506. To help finra process comments more efficiently, persons should use only one method to comment on the proposal. Important Notes: All comments received in response to this Notice will be made available to the public on the finra website. In general, finra will post comments as they are The proposed rule change must be filed with the Securities and Exchange Commission (SEC) pursuant to Section 19(b) of the Securities Exchange Act of 1934 (SEA or Exchange Act).5. Background & Discussion finra uses a combination of tools to reduce misconduct by member firms and the brokers they hire, including SD processes, review of membership applications, disclosure of brokers'.

7 Regulatory backgrounds,6 supervision requirements, focused examinations, risk monitoring and disciplinary actions. These tools, among others, serve to further the Exchange Act goals reflected in finra 's mission of protecting investors and market integrity, including protecting investors from brokers with a history of significant past misconduct and the firms that choose to employ them. Formal action to bar or suspend a broker requires finra to satisfy procedural safeguards established by federal law and finra rules to ensure fair process and to protect the rights of brokers to engage in business unless proven guilty of serious misconduct. Those safeguards include the right to defend oneself before a hearing panel and the right to appeal to the NAC, the SEC, and ultimately the federal courts.

8 In addition, federal law and regulations define the types of misconduct that presumptively disqualify a broker from associating with a firm, and also govern the standards and procedures finra must follow when a broker who was found to have engaged in such misconduct applies to remain in or re-enter the Regulatory Notice 3. 18-16 April 30, 2018. Current Programs As discussed further below, finra strives to prevent and deter misconduct by member firms and the individuals they hire through a number of different measures. 00 Licensing and Registration To become a finra member, a firm is subject to review through finra 's membership application program. As part of a new membership application (NMA) or a continuing membership application (CMA) under the Rule 1010 Series, finra reviews, among other factors, whether persons associated with an applicant have material disciplinary history, customer complaints, pending and final arbitrations, civil actions or other industry-related matters that could pose a threat to public investors.

9 Where finra . can show strong cause for concern, we can deny membership or place restrictions on membership to mitigate the risk. The membership application process also provides procedural safeguards for the applicant: applicants have the right to request review by the NAC of an adverse decision or the finra Board may call for a discretionary review of a membership proceeding. The applicant also may appeal final finra decisions to the SEC and the circuit courts. 00 Statutory Disqualifications Eligibility Proceedings finra administers the SD process by assessing applications from member firms that wish to retain or employ an individual who is the subject of an SD. In conducting the assessment, finra seeks to exclude individuals who pose a risk of recidivism from continuing in the securities business.

10 As a general framework, the Exchange Act sets out the types of broker misconduct that presumptively exclude brokers from engaging in the securities business. These types of misconduct, entitled statutory disqualifications, are actions against an individual or member firm taken by a regulator or court based on a finding of serious misconduct that calls into question the integrity of the broker or firm. SDs include any felony and certain misdemeanors for a period of 10 years from the date of conviction; expulsions or bars (and current suspensions) from membership or participation in a self-regulatory organization;. bars (and current suspensions) ordered by the SEC, Commodity Futures Trading Commission, or other appropriate regulatory agency or authority; willful violations of the federal securities and commodities laws or MSRB rules; and certain final orders of a state securities commission.